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The Texas attorney general has filed 16 separate lawsuits against 16 auto insurers alleging that the companies illegally underpaid property damage claims by making deductions for betterment and depreciation. The cases were filed on Feb. 15 in Texas district court in Travis County.

Betterment is when an insurance company pays to replace a used product with a new product (such as an engine), but does not cover the entire cost of the replacement because the policyholder got use out of the original.

Attorney General John Cornyn says that deducting for betterment is a common practice in Texas, but that the state's "personal auto policy does not allow it." A November 1998 Texas court of appeals decision (Great Texas County Mutual Insurance Co. vs. Emmett C. Lewis) affirms Cornyn's assertion. The court ruled that "by reducing its payment to Lewis by 'betterment' or 'depreciation, ' the company failed to provide Lewis with an amount of money sufficient to make his vehicle as serviceable as it was before the loss."

State Farm Mutual Automobile Insurance Co., Texas' largest auto insurer and one of the named defendants, discontinued betterment-related practices in April 1999, according to Dean Brand, public affairs manager for the southern region of Texas for State Farm. The company did so because of the Lewis case, he says.

State Farm has not yet been served with the lawsuit, according to Brand, but he contends that prior to the Lewis case there was "no case law, no regulation, and no guidance from the insurance department" about holding back claim money for betterment. "We strongly feel that retroactive application of this would be unfair," says Brand. Sharon Cooper, spokesperson for Allstate Insurance Co. in Texas, says Allstate stopped deducting for betterment on March 1, 1999, for "competitive business reasons." She also says the company believes the deductions for betterment are consistent with the language of the Texas personal auto policy. Allstate, the No. 2 auto insurer in Texas, has not yet been served with the lawsuit.

The Texas Department of Insurance was kept abreast of the attorney general's actions, but it did not participate in gathering information for the lawsuits, says Lee Jones, a spokesperson for the department. However, the department is expected to issue a bulletin to all auto insurers in the state within the next week about the ruling made in the Texas County Mutual case, according to Jones.

ABig dollars at stake? Cornyn's office is seeking permanent injunctions against betterment practices, plus civil penalties of $10,000 per violation. The civil penalties would be paid to the state's general fund. The lawsuits are also seeking reimbursement of all betterment deductions plus interest for affected policyholders.

Heather Browne, a spokesperson for the attorney general's office, says the number of violations and policyholders affected is yet to be determined. She says the court will determine the number of violations, the penalties, and who should be reimbursed.

Whether or not more lawsuits will be filed against other insurers, Browne would not say. The insurers that are being sued have 30 days to respond to the attorney general's office.


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